Financial-services companies' reserve levels and the improvement in tangible equity helped persuade Berkowitz to invest in the firms, he said.
"Our thesis on financials, it's pretty simple," he said. "We expect that over a cycle, systemically important financial institutions, that are too-big-to-fail, that already have been recapitalized, will have the ability to earn a 10 percent return on equity."
Firms that trade below book value, a measure of assets minus liabilities, are even more attractive, he said. AIG's stock price was about 60 percent of book value on Feb. 10 and Bank of America's was about 40 percent, Bloomberg data show.
Financial firms, including AIG, may boost returns with deferred tax assets that can limit future payments to the government, Berkowitz said. Losses at the insurer helped it rack up more than $25 billion in the tax assets by the end of 2010, according to a company presentation.
At the end of November, the Fairholme Fund held 81.6 million shares of Bank of America, a stake valued at about $659 million based on last week's closing price. The fund also held 84.4 million shares in AIG, which would have been valued at $2.25 billion on Feb. 10. Berkowitz also has warrants to buy 21.6 million shares of the insurer at $45 each by January 2021.
The Fairholme Allocation Fund held warrants to buy about 314,000 JPMorgan shares at $42.42 apiece and about 760,000 shares of San Francisco-based Wells Fargo at $34.01 each by October 2018, according to the annual report. JPMorgan closed at $37.61 on Feb. 10 and Wells Fargo ended last week at $30.26.
Wells Fargo agreed to buy competitor Wachovia Corp. in 2008 as New York-based JPMorgan acquired Washington Mutual Inc. and Bear Stearns Cos. AIG has sold more than $50 billion in assets, including non-U.S. life insurance operations and a consumer lender, to help pay back a government bailout that swelled to as much as $182.3 billion.
Berkowitz was named the U.S. domestic stock fund manager of the decade in 2010 by Morningstar Inc., a Chicago-based research firm. The Fairholme Fund has returned an annualized 9.6 percent since its inception at the end of 1999 through Dec. 31, compared with a gain of less than 1 percent a year for the S&P 500, according to Berkowitz's report.